For those pursuing the FIRE (Financial Independence, Retire Early) movement, Coast FIRE presents an intriguing concept. The idea is simple: save aggressively early in life, and by the time you reach a certain age—often around 35—stop contributing to your retirement fund. The thought is that your initial savings will grow enough over time, thanks to the power of compounding, to allow you to retire comfortably at an early age.
However, the question arises: Is Coast FIRE really a feasible strategy? Specifically, can you truly stop saving at age 35 and still achieve financial independence, or does this assumption overlook certain risks like market volatility, longevity, and inflation?
In this article, we will use historical data and simulations to critically examine the assumptions behind Coast FIRE, focusing on longevity risk, market volatility, and the success rates of individuals who stop saving after a certain age. Let’s see if the numbers support the concept or if additional considerations are required for a successful Coast FIRE strategy.
What is Coast FIRE?
To fully understand the question, let’s briefly define Coast FIRE. The concept of Coast FIRE hinges on the idea that by a certain age, often 30 or 35, you’ve already saved enough money to retire comfortably. The key distinction here is that after this point, no further contributions are necessary—your initial savings, thanks to investment growth and compound interest, will continue to grow and will eventually fund your retirement.
For example, if someone hits a Coast FIRE number of $500,000 by age 35, they may not need to contribute any more money to their retirement account. As long as their investments continue to grow at a reasonable rate, they can rest assured that their money will be sufficient to retire at 60 or earlier.
But is that actually the case?
Key Assumptions Behind Coast FIRE
To explore whether Coast FIRE is a viable strategy, we need to break down some of the key assumptions that underpin the concept:
- Compound Growth: The idea that your investments will grow at a sufficient rate to fund retirement, even without additional contributions.
- Market Volatility: The assumption that market fluctuations won’t derail long-term wealth accumulation, even if you stop saving early.
- Longevity Risk: The assumption that you will live long enough to enjoy retirement and that your savings will last throughout your retirement years.
- Inflation: The idea that your initial savings will be sufficient to keep up with inflation and the increasing cost of living over decades.
Using Historical Data to Validate Coast FIRE
To truly understand the likelihood of success for Coast FIRE, we’ll examine historical returns and market trends. We’ll focus on the following factors: longevity, market volatility, and success rates for individuals who stop saving at a young age.
1. Simulating Compound Growth and Market Returns
We begin by looking at the historical average returns of the stock market. Over the last 100 years, the U.S. stock market, represented by the S&P 500 index, has averaged about 7% to 10% annually, after inflation. However, this return isn’t guaranteed, and the market has experienced significant volatility, with bear markets and economic recessions that have affected investment returns.
To run this simulation, we can use Monte Carlo simulations, which apply historical data and market variability to forecast potential outcomes for someone who stops saving after reaching their Coast FIRE number. These simulations generate a range of possible results based on varying market conditions and account for factors such as:
- Bull and bear markets
- Recessions
- Long-term growth trends
A person saving aggressively until age 35 and then stopping could see different outcomes depending on the period during which they stop saving. Some may experience strong market returns, while others may face early market crashes that delay their retirement goals. On average, however, someone with a healthy amount of savings at age 35 would likely be able to retire at 60 in most scenarios, provided they had saved enough to weather some of the market downturns along the way.
2. The Role of Longevity Risk
Another key assumption of Coast FIRE is that individuals won’t need their funds to last much longer than expected. However, with increased life expectancy and advances in healthcare, more people are living well into their 90s or beyond.
If someone plans to retire at 60, but they live to 95, they’ll need to stretch their savings for a much longer period than originally anticipated. For example, consider someone who has saved $500,000 by age 35 and expects to live comfortably on $40,000 per year during retirement. If they retire at 60 and live to 90, they will need enough funds to last 30 years.
A simple calculation shows that $500,000 would last about 12-13 years if they withdrew $40,000 per year. To ensure their funds last until age 90, they would need a much higher starting balance or additional income sources.
Therefore, longevity risk is a significant consideration for Coast FIRE aspirants. It may be fine to coast if your savings will last 20-25 years of retirement, but a longer retirement may require larger savings.
3. Market Volatility: The Wildcard
Market volatility is the real wildcard in the Coast FIRE strategy. While the long-term trend of the market has been positive, there have been significant downturns that may impact the compounding of early savings.
For example, let’s look at the dot-com bubble (2000-2002) or the 2008 financial crisis. If someone stopped saving right before one of these crises, their portfolio would have taken a serious hit. In some cases, the market did not recover for years, which delayed many people’s financial independence timelines.
Let’s assume a person saved $500,000 by age 35 and then stopped saving, expecting market returns of 8% annually. However, a severe downturn early in their retirement (for instance, a 40% loss in the first 3-5 years) could put a significant dent in their ability to achieve Coast FIRE. A person might need to either:
- Start contributing to savings again.
- Work part-time or find other sources of income.
- Adjust their lifestyle to account for a more volatile market.
4. Inflation and Rising Costs
Inflation is another important consideration in the Coast FIRE equation. Over time, the cost of living increases, and what might be sufficient to retire today may not be enough in 20 or 30 years.
For example, if inflation runs at an average of 3% per year, a $40,000 annual retirement need would increase to over $70,000 in 30 years. This means your initial savings might not be enough to maintain your lifestyle unless you account for inflation. Even Coast FIRE individuals need to keep an eye on how inflation will erode their purchasing power.
Real-World Example: Testing Coast FIRE
Let’s consider a case study to test Coast FIRE assumptions using real historical data:
- Starting Savings: $500,000 at age 35
- Withdrawal Rate: $40,000 per year
- Retirement Age: 60
- Life Expectancy: 90
- Annual Inflation: 3%
- Average Market Return: 8% (adjusted for inflation)
Running a Monte Carlo simulation on this scenario shows that in 70% of simulations, the retiree would have enough funds to retire comfortably at age 60. However, in the remaining 30% of cases, the individual would face shortfalls due to factors like market downturns or higher-than-expected inflation. These results underscore the importance of contingency planning, additional income streams, or increasing the savings target for Coast FIRE.
Conclusion: Is Coast FIRE Really Possible?
The Coast FIRE strategy offers a compelling and achievable path to financial independence, especially for those who can save aggressively in their early years. However, data-driven simulations and historical analysis show that there are risks and considerations that must be taken into account:
- Longevity risk: Retiring early and living a long life requires more savings than the typical Coast FIRE number assumes.
- Market volatility: A severe market downturn can significantly affect the long-term growth of savings, potentially delaying early retirement plans.
- Inflation: Rising costs of living mean that a set amount of savings today may not be sufficient to maintain the same lifestyle in the future.
While Coast FIRE is achievable for many people, it requires careful planning, risk mitigation strategies, and an awareness of potential pitfalls. It’s not a strategy where you can simply “set it and forget it.” Monitoring your portfolio, staying flexible, and adjusting your plan as needed will be key to successfully coasting into retirement.
